UK Energy Prices Will Only Go Up

Posted on 21. Sep, 2009 by Ross in Energy Prices, United Kingdom

The big six energy suppliers have told the regulator Ofgem that there is little chance of any further cuts in their tariffs this coming year, responding to calls from Ofgem for them to pass on more of the recent falls in wholesale energy costs.

Ofgem estimates lower costs will boost suppliers’ gross profit on each dual-fuel customer by £60 this year, whereas the firms say other costs which make up 40% of bills are rising steeply.

Businesses therefore cannot hope for energy price cuts to lower their operational overheads, meaning that energy efficiency investments will continue to provide an important tool in a company’s cost-cutting arsenal.

In August, Ofgem wrote to each of the big six energy firms, urging them to respond to falling wholesale prices as some poorer customers would be suffering hardship from high prices during the winter. Depending on how good suppliers were at buying their energy in advance, the regulator says their wholesale electricity costs have fallen in the past six months by more than £7/MWh, equivalent to £29 per customer’s annual bill. Meanwhile gas wholesale costs to the energy companies have dropped by an average of 10p per therm, or £59 for each customer’s bill.

However, Ofgem has no powers to act against the energy companies. Peter Luff MP, chairman of the Business and Enterprise Committee, responded to the news, by saying:

My committee warned the government and Ofgem last year that the energy markets were not working properly… this is further compelling evidence that that is the case.

In essence, Ofgem is trying to shame the companies, but so far the firms are insistent there will be no price cuts, and in fact some have warned that prices may have to rise.

British Gas

Prices [are] likely to remain at historically high levels, and in fact likely to increase as non-commodity costs rise ever upwards.

EDF Energy

We would of course be prepared to reduce tariffs if market conditions allow.

E.ON

[We] do not believe there is a clear message regarding future wholesale costs movements that can be communicated to customers.

RWE

A retail price commentary cannot be based only on a narrow view of wholesale costs and in any event wholesale costs need to be weighed against increases in other costs.

Scottish and Southern Energy

With forward annual wholesale prices significantly higher, and with upward pressures in terms of distribution, environmental and social costs, seeking to avoid an increase between now and the end of 2010 is an important goal.

Scottish Power

There are no immediate signals that would indicate a fall in retail prices for this winter, and risks of an increase next year.

Ofgem estimates that the gross profit of each of the big six firms for the next year will amount to an average of £170 per dual-fuel customer, compared to an average gross profit of £110 over the past three years. Looking ahead by 12 months, Ofgem estimates that the wholesale cost of electricity will fall by around £25 per customer and that of gas by around £40.

Meanwhile, Scottish Power has been looking at other ways of maximising returns. After pressure by Ofgem to remove all of its pre-pay meters from some of the country’s poorest households, it has completed an installation of 340,000 pre-pay smart meters which enable the company to track it’s customers’ energy usage more effectively, whilst still switching off when the credit runs out… so long as the shops are open for customers to top up their credit. This enables them to keep selling the electricity over evenings and weekends when domestic demand is strongest, meaning they don’t miss out on more sales!

Image of electricity pylons by ajari @ Flickr